We get asked about pricing all of the time. Usually, the inquisitor is looking for a simple answer but the topic is vastly complex due to the many variables involved.
Pricing is a key element of market strategy and a powerful lever in your arsenal. It is intrinsically tied to your position in the market and is only as effective as your strategy as a whole.
You must be very clear about who your target buyer is, their buying triggers and where you want to play in the competitive landscape. A good place to start is with a firm commitment to the concept: we are not all things to all people but we deliver distinct value to this particular group of people.
Once you have identified the opportunity in the market and defined the most advantageous position to capture that portion of the market, then it is time to think through some of the textbook pricing elements.
First, the demand curve. Do some market research to understand what percentage of your target buyers will buy at particular price points. This information, coupled with your fixed and variable costs will bring gross margin into focus.
From there, you can decide whether you will take a market penetration or skimming approach, dependent on several things: 1. The chosen market position and strategy. 2. Market size and growth rate. 3. Open market share. The economies of scale strategy works best in a large market that is under-penetrated.
There are important psychological factors to consider as well. If your strategy is to capture the upper end of the market by offering a premium product, implementing a lower price point to drive volume may not be the best way to go. Understand the competitive offering to consider popular or established price points and what the buyer considers to be fair.
The pricing has to be in step with the positioning. People really do believe that you get what you pay for.
Last bit of advice: avoid short-term pricing tactics if you can. Short-term revenue maximization at the expense of longer-term strategy and profit margins may look good to investors or position the company for acquisition in certain situations but can set the company up for less growth in the longer run. Once you establish your pricing, you imprint the market. It is possible to start high and lower prices but it is very difficult to raise prices and move up market once you’ve been pegged as a value player.
What do you do if you want to change course? Consider launching a revised or new product offering for another market segment or shake up the market with a new pricing model. Study the competitors and do something different that provides more value to the buyer while maintaining profit margins for the company. If the industry charges a high flat fee that puts a stranglehold on buyers’ cash flow, why not offer a subscription or finance model instead?
Whatever you do, don’t succumb to the price war. When underpricing is the only weapon used, no one wins.
Jocelyn Atkinson and Michael Graber run the Southern Growth Studio, a strategic growth firm based in Memphis. Visit www.southerngrowthstudio.com to learn more.